Tax Issues In Bankruptcy

13 Mar Tax Fact 4-Only Certain Mortgage Debt Qualifies For Exclusion

Mortgage debt forgiveness is considered to be income unless it is excluded. Principal residence debt has its own exclusion from income if it is cancelled or forgiven by the lender. To “qualify” it must be what is defined by the Internal Revenue Service as “qualified principal residence debt”. The debt must have been used to buy, build or substantially improve the principal residence of the taxpayer and the home must act as security for the debt. With the substantial increase in home prices that occurred over the ten years beginning in 2000, many people sought to access this “residential piggy bank” by refinancing their home.
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12 Mar Tax Fact 3-Debt Cancelled through Mortgage Restructuring is Eligible

The IRS, in listing ten important facts about mortgage debt forgiveness, points out that debt on a principal residence that is cancelled by restructuring the loan in cooperation with the lender can exclude it from taxable income. Subject to the two million dollar limit on the Mortgage Forgiveness Debt Relief Act of 2007, a write down of the balance due to a lender, which can cause cancellation of debt, may qualify for exclusion of that debt cancellation from income. With the government sponsored Home Affordable Modification Program (HAMP), modifications are beginning to pick up speed which means mortgage restructuring may become a more common occurrence.
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11 Mar Tax Fact 2-Mortgage Debt Forgiveness Exclusion Financial Limits

In order to qualify for full exclusion from income when debt is cancelled on the taxpayer’s principal residence, the amount of debt cancelled cannot be more than two million dollars for a married couple or individual; or if an individual is married but filing a separate return, the debt cancelled cannot be more than one million dollars. Even in California that would be a pretty big house. The two million dollar limit does not refer to the amount of the home loan, the limitation is only applied to the amount of debt cancelled or forgiven. The amount of debt cancelled is calculated by subtracting the fair market value of the principal residence from the amount of debt secured against it at the time of cancellation.
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10 Mar Tax Fact 1-The Mortgage Forgiveness Debt Relief Act of 2007

The IRS wants taxpayers to know about the Mortgage Forgiveness Debt Relief Act of 2007. In the waning weeks of 2007, Congress passed and President Bush signed into law this remedial legislation. Initially limited to tax years 2007, 2008 and 2009, the law was intended to prevent debt cancellation tax for unfortunate home owners who lost their home to foreclosure. Congress, as part of the stimulus legislation passed in 2009, extended the life of the statute through tax year 2012. Limitations on this statute and details of debt cancellation tax will be explored in later articles. However, it is important to note that the statute, which amended the tax code, added a specific exemption for home loans and forgiveness of debt up to two million dollars when the taxpayer’s principle residence is involved.
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09 Mar Ten Tax Facts About Mortgage Forgiveness

Home foreclosure numbers are growing despite (inadequate) government efforts to stem the tide. Due to falling prices and a floundering economy more homes are likely to be lost in the future. The Mortgage Forgiveness Debt Relief Act of 2007 provides some relief from possible tax liability associated with foreclosure. With this in mind, the IRS has published a list of ten facts it wants taxpayers to know about debt cancellation associated with Mortgage Foregiveness. In the words of the IRS, direct from their website:
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